How to think about India's stock returns in the coming years

A simple seven factor framework

Let us break down into seven components the returns from any country’s broad basket of equities:

  1. GDP/capita growth (secular + cyclical)

  2. Population (and workforce) growth

  3. Inflation (short term, long term impact)

  4. Currency change (depends on one’s base)

  5. Sales/GDP (listed vs unlisted cos revenue)

  6. Profit/Sales (operating/financial leverage)

  7. Multiples + Dividends/Dilution/IPOs etc.

In the coming days and weeks, I will try to go think through and write about each of the seven components in their own post or posts. I will try to quantify them where possible in the Indian context. I will update this post with those links accordingly. In the meanwhile I could also write about some other themes or securities, but the priority would be to go through this framework first.

You can for example break down the returns of SPY (ETF for S&P500 in the US) for the last 5 or 10 years to each of these seven components. If you were to do it for QQQ (NASDAQ) then the listed company base would be smaller, and for IWV (Russell 3000) it would be larger and so on. It is somewhat like a DuPont analysis, except you do it for an entire country (or basket) not just a company.

Yes, even within countries there are differences between Large Cap vs All Cap indices as shown above, or Growth vs Value and so on - depending on interest rate and technology shifts. I will try to cover that as well at some point.

Of course many do not invest or just invest in indices/ETFs: if your portfolio is more concentrated, then alpha (stock selection) maybe more important than beta (passive exposure). But we are first deciding whether India is even worth looking at as a significant option for a global investor.

I would like to leave you with a teaser with respect to Factor 1 (i.e. real GDP/capita growth), the most important one for long term investors. The graph below is for India from 1961 to 2018 as per latest World Bank data available. The graph is self-explanatory for anybody who observes carefully but I have added a 10 year moving average just in case.

You can see that India’s per capita growth moving average has been constantly increasing since about 1980. Indeed unlike China which went through violent convulsions such as Cultural Revolution, Great Leap Forward and One Child Policy - Indian data for both economics and especially demographics has been relatively ‘smooth’ over the decades. Of course, ‘jerky’ data looks more authentic and Indian official data is not perfect, but it is fairly representative over large periods of time.

In any case, more on per capita growth very soon. But especially for those who think that the India story is over or that it is still there but not so attractive anymore, the above graph maybe some interesting food for thought!

Have a good day,

Harsh.